Income Taxes

12 Months Ended

Jan. 01, 2019

The following table presents the domestic and foreign components of income (loss) before income taxes for 2018, 2017 and 2016 (in thousands):



	2018			2017			2016
Domestic loss	$	(8,689	)	$	(42,047	)	$	(67,626	)
Foreign income (loss)	—			4,358			(2,818		)
	$	(8,689	)	$	(37,689	)	$	(70,444	)

The components of the (benefit) provision for income taxes are as follows for 2018, 2017 and 2016 (in thousands):



	2018			2017			2016
Current tax provision:
Federal	$	—		$	—		$	—
State	35			21			134
Foreign	—			—			—
	35			21			134
Deferred tax (benefit) provision:
Federal	(202		)	(252		)	(1,979		)
State	(81		)	24			2,854
Foreign	—			—			224
	(283		)	(228		)	1,099
Total (benefit) provision for income taxes	$	(248	)	$	(207	)	$	1,233

The reconciliation of income tax (benefit) provision that would result from applying the federal statutory rate to pre-tax income as shown in the accompanying Consolidated Statements of Operations is as follows for 2018, 2017 and 2016 (in thousands):



	2018			2017			2016
Federal income tax benefit at federal rate	$	(1,825	)	$	(12,814	)	$	(23,740	)
State income tax benefit, net of federal tax	(623		)	(1,790		)	(2,975		)
Other permanent differences	70			674			996
Foreign rate differential	—			(463		)	214
Tax credits	(602		)	(808		)	(749		)
Change in valuation allowance	2,600			(159		)	27,353
Tax rate change	(248		)	13,632			—
Deferred tax asset write-off	212			2,618			—
Other items, net	168			(1,097		)	134
(Benefit) provision for income taxes	$	(248	)	$	(207	)	$	1,233
Effective income tax rate	2.9		%	0.5		%	(1.8		)%

The Company’s total deferred tax assets and liabilities are as follows (in thousands):



	2018			2017
Deferred tax assets	$	50,851		$	47,027
Deferred tax liabilities	(12,212		)	(11,632		)
Total deferred tax assets	38,639			35,395
Valuation allowance	(38,772		)	(35,811		)
Net deferred tax liabilities	$	(133	)	$	(416	)

Deferred income taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following (in thousands):



	2018			2017
Deferred tax assets (liabilities):
Loss carry forwards	$	32,896		$	26,991
Deferred rent and franchise revenue	10,433			10,486
Property, equipment and intangible assets	(10,472		)	(9,858		)
Stock-based compensation	1,242			1,086
Tax credit carry forwards	3,528			3,123
Interest expense	998			—
Inventory smallwares	(1,740		)	(1,774		)
Other accrued expenses	959			4,320
Other	795			1,021
Total net deferred tax assets	38,639			35,395
Valuation allowance	(38,772		)	(35,811		)
Net deferred tax liabilities	$	(133	)	$	(416	)

For the year ended January 1, 2019, the Company determined that it was appropriate to maintain a valuation allowance of $38.8 million against U.S. deferred tax assets due to uncertainty regarding the realizability of future tax benefits. The valuation allowance is recorded against net deferred tax assets, exclusive of indefinite-lived intangibles. During 2018, the Company generated indefinite- lived net operating loss (“NOL”) carry forwards and indefinite-lived interest deductions. These assets reduce the year end net deferred tax liability, which creates a current year benefit to tax expense of $0.3 million. The Company will maintain the remaining valuation allowance until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit to the effective tax rate.

The Company closed all Canadian restaurants and discontinued foreign business operations during the year ended January 2, 2018. As a result, all Canadian deferred tax assets were written off against the previously recorded Canadian valuation allowance.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changes to the Internal Revenue Code that will impact the Company. For tax years after December 31, 2017, the corporate income tax rate is reduced from 34% to 21%. On the same date, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued by the SEC to address the application of GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. During the year ended January 1, 2019, the Company completed its analysis of the Tax Act and determined that no adjustments were needed for provisional taxes reported for the year ended January 2, 2018.

As of January 1, 2019 and January 2, 2018, NOL carry forwards for federal income tax purposes of approximately $124.8 million and $106.8 million, respectively, were available to offset future taxable income. Of these amounts, $106.8 million is available to offset future taxable income through 2037. A federal NOL of $17.9 million created during the year ending January 1, 2019 can be carried forward indefinitely, but can only offset 80% of future taxable income. The Internal Revenue Code Section 382 generally limits the utilization of NOLs when there is an ownership change. The Company has not completed an analysis of ownership changes through January 1, 2019. Prior to the utilization of NOLs in the future, the Company will complete a Section 382 study to determine whether there are any limitations. If such a limitation exists, it is possible that a portion of the NOLs may not be available for use before expiration.

Uncertain tax positions are recognized if it is more likely than not that the Company will be able to sustain the tax position taken, and the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.

There were no uncertain tax positions for the years ended January 1, 2019 or January 2, 2018. For federal and state income tax purposes, the Company’s 2014 through 2017 tax years remain open for examination by the authorities under the normal three year statute of limitations. Should the Company utilize any of its U.S. or state NOLs, the tax year to which the original loss relates will remain open to examination.